F.N.B. Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The Pittsburgh-based diversified financial services company operated banking offices in Pennsylvania, Ohio, Maryland and West Virginia, plus consumer finance offices in four states. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $120.6 | $99.3 | $342.6 | $289.1 |
| Provision for loan losses | $11.2 | $7.3 | $28.6 | $22.7 |
| Non-interest income | $37.6 | $32.8 | $118.8 | $103.1 |
| Non-interest expense | $95.8 | $83.2 | $282.6 | $246.1 |
| Net income | $35.4 | $31.6 | $104.7 | $89.4 |
| Net income available to common shareholders | $33.4 | $31.6 | $98.4 | $89.4 |
| Diluted EPS | $0.20 | $0.22 | $0.59 | $0.62 |
- Margins and returns: Q3 net interest margin was 3.63%, versus 3.64%; nine-month margin was 3.62%, versus 3.64%. Q3 return on average assets was 0.92% and return on average equity 7.28%, compared with 0.99% and 8.50%. These returns were affected by acquisitions and increased equity.
- Balance sheet at September 30: Total assets were $15.76 billion, net loans $10.85 billion, deposits $11.45 billion and stockholders’ equity $2.01 billion. Compared with December 31, 2013, these were higher by approximately 16%, 15%, 12% and 13%, respectively; acquisitions contributed materially to the growth.
- Credit quality: Allowance for loan losses was $120.6 million, or 1.10% of total loans. Nine-month net charge-offs were $18.8 million, or 0.25% annualized of average loans. Non-performing loans were $76.9 million (0.70% of loans); non-performing assets were $115.9 million (0.74% of assets).
- Cash flow: For the first nine months, operating cash flow was $378.5 million, investing cash outflow $1.36 billion and financing cash inflow $1.01 billion. Cash and equivalents increased $24.0 million to $238.0 million.
- Debt and funding: Short-term borrowings were $1.60 billion, long-term debt $483.2 million and junior subordinated debt $58.2 million. Deposits plus customer repurchase agreements totaled $12.31 billion.
Material changes and drivers
- Q3 net income rose 12% year over year, but diluted EPS fell from $0.22 to $0.20. Net income available to common shareholders increased less than total net income because of $2.0 million in preferred dividends and a 15.3% increase in average diluted shares.
- Nine-month common earnings rose about 10%, while diluted EPS declined from $0.62 to $0.59, reflecting share-count growth and preferred dividends. Results included acquisitions of BCSB (February 2014), OBA (September 2014), and PVF (October 2013); ANNB’s acquisition also contributed to the nine-month comparison.
- Net interest income growth reflected larger earning assets, including acquired and organically grown loans. Lower asset yields were partly offset by reduced funding costs; the nine-month average yield on earning assets declined to 3.94% from 4.06%, while the rate on interest-bearing liabilities declined to 0.41% from 0.51%.
- Nine-month non-interest income included $11.4 million in net securities gains, including a $13.8 million gain from selling the pooled trust-preferred securities portfolio, partly offset by losses on other securities. The sale included one security identified as a Volcker Rule-disallowed investment.
- Expenses rose substantially, primarily with the larger acquired operations. Merger-related expense was $8.1 million for the first nine months, versus $4.2 million a year earlier. Q3 merger expense was $1.9 million.
Liquidity, capital, outlook and risks
- Management described liquidity as strong. The parent-company liquidity coverage ratio was 2.2x (internal minimum greater than 1.0x), and months of cash on hand were 14.0 (internal minimum greater than 12). FNBPA reported $4.8 billion of unused wholesale credit availability and $902.9 million of salable unpledged government and agency securities.
- At September 30, the Corporation’s total risk-based capital ratio was 12.3%, Tier 1 risk-based ratio 11.1% and leverage ratio 8.7%; FNBPA’s respective ratios were 11.7%, 10.7% and 8.4%. Management reported both entities met “well-capitalized” requirements.
- Interest-rate modeling indicated a modest benefit to net interest income if rates rise; a 100-basis-point increase was estimated to raise 12-month net interest income 1.4%, while a 100-basis-point decrease was estimated to reduce it 1.6%. These are model estimates, subject to assumptions about deposit behavior, prepayments and future balance-sheet actions.
- The filing provides no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results. It cited economic conditions, interest rates, credit performance, regulation, competition, cybersecurity and acquisition integration as risks.
- The OBA acquisition’s purchase-price allocation remained preliminary; it recorded $18.2 million of goodwill and $4.3 million of core deposit intangibles. The OBA shareholder lawsuit was voluntarily dismissed September 15, 2014. Other legal proceedings remained pending; management did not expect a material adverse effect on financial position but could not rule out effects on future-period results.
Investor verification priorities
- Assess how much of loan, deposit and earnings growth reflects acquisitions versus organic growth, and whether integration costs and expected synergies are tracking as anticipated.
- Review diluted EPS pressure, the larger share count, preferred dividends and the sustainability of earnings excluding securities gains and merger-related items.
- Monitor credit quality and reserve adequacy as the loan portfolio expands, including acquired-loan performance, charge-offs, TDRs and allowance coverage.
- Confirm funding composition, borrowing growth, liquidity metrics and regulatory capital effects as the bank transitions to new capital standards.
- Evaluate sensitivity to interest rates and the assumptions behind management’s asset-liability models and positive-rate scenario estimates.